Economics of Taxation Essay Example | Topics and Well Written Essays - 1000 words - 1

Economics of Taxation - Essay Example Does the Family Credit alter the marriage penalty or bonus? Under the current 2006 tax system, the value of the personal exemption and standard deduction for household 1 (married couple) would be a consolidated amount of $16, 400. This is made up of the personal exemption of $3200 ($6400 for 2) and a joint standard deduction for the married couple of $10,000. The same value calculated for household 2 amounts to $8200 for personal exemption ($3200) and standard deduction ($5000). As per the Simplified Income Tax Plan proposed by the advisory panel on tax reform, Family Credit replaces the personal exemption and standard deduction. It is available to all taxpayers. For a married couple with no children, it amounts to $3300 whereas for an unmarried taxpayer it is $1650. Assuming that the current income tax brackets prevail, the following comparative analysis would justify whether the taxpayers prefer the old tax code or the new Simplified Tax Plan: 2. Which is more equitable: the current system with the personal exemption and the option to take either the standard or itemized deduction, or the Family Credit which everyone can take, even if they also itemize deductions? Discuss both horizontal and vertical equity and explain your answer. Solution: â€Å"Tax equity focuses on equal treatment of similarly situated taxpayers† (Sommerfeld, Anderson, & Brock 9). There are two tax principles, namely, horizontal equity and vertical equity. Horizontal equity is a basic yardstick used to measure whether tax burdens are fairly distributed. According to this principle, taxpayers with same income should pay the same amount in taxes. On the other hand, the principle of vertical equity is a proponent of the progressive structure of tax assigning high income earners greater responsibility to share the tax bill (Kaplow 1989). Under the current system, personal exemption is available to